Spread Arbitrage: Chipotle Mexican Grill

May 8, 2009 11:17 am

On the heels of a few trading publications we saw the opportunity to take advantage of the spread differential between the Chipotle Mexican Grill (CMG) B Shares and the Chipotle Mexican Grill A shares. The A & B shares are fairly identical with the B shares carrying more voting rights but also contain less liquidity. Institutional players have shied away from the B shares due to this liquidity problem and the fear of moving the market dramatically. Thus, the B shares have typically lagged the A shares when the stock has made extreme movements.

In the chart below, you will see in the bottom right hand corner the occurrences distribution. The distribution spans from 0% to 30% premium and historically we have seen the A shares trade at a premium of 11% to the B shares. We will be looking for this trade to move back toward normal distribution as we picked up the trade at an approximately 22% spread premium.

(Click Chart for Larger View)


Fundamentally the liquidity has made the B shares much more attractive than the A shares. Cash flow per share is almost identical, Book Value on the B shares are trading at 3.53X vs. 4.24X on the A shares and the P/E ratio is trading at 28 on the B shares vs. 31 on the A shares.

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